‘Prior … preparation … prevents … piss … poor … performance’ a common saying in the British Military
This week’s blog is chapter 15 from the book I am currently writing (My 2nd book is called The Dormant Landlord) …. It is all about the prep work involved with buying property
Now, the last thing I want to do is bore you to death with figures. But we absolutely have to do the prep work.
Before we get stuck in, we need to review our goals. 1st our financial goals. Then our property goals.
One of my main goals is to be FI. At the back end of 2018, I set myself a realistic goal of FI before I am 45. If not sooner!! I was 35 so that gave me 10 years.
After giving it some serious thought, I decided that figure would be £4k pcm and £48k pa. But we are doing this book together as a team. And our FI figure is going to be £30k pa as this is the national average wage in the UK as I am sat writing away.
Now we have a realistic goal to aim for, we can start putting the plan in to place.
£30k divided by 12 months = £2.5k pcm required. From my experience, it is very achievable to get £250 pcm per property. This is based on properties in the North East of England so the figures are dependent on your geographical location.
With these Northern figures in mind, we need to get 10 properties to reach our monthly target of £2.5k. To be clear, that is profit after all expenses and tax are taken care of.
Now before we go any further, I want to stop to mention why I am using realistic, achievable goals and expectations. Acquiring 10 properties is very achievable. It’s not very sexy and isn’t going to help you to become a millionaire. But we are a team. And I want to help as many people as possible get into property. And to get into property with solid foundations.
You might reach our target and want to push on and become a property millionaire. That’s all good and I wish you well. The reality is that property isn’t easy and it’s very rare to go out and buy 20 properties in year 1. Or go out and buy 5 HMO’s in year 1 and boom your set for life.
This is what many training companies are selling. They funnel you into expensive training by selling you the dream. I want you to have the dream. But I want you to build your foundations first. After all, Rome wasn’t built in a day.
Back to the prep work and we will start with our target for each property. We are looking for £250 profit pcm. Just to be clear, I am not going to go over tax. Everyone has their own situation and their own tax to consider. Not only that, most people’s accountants have their own interpretation of tax. Well, that is from my experience anyway.
As we touched on in chapter 13, our ROI is the figure we are looking for. To get ROI, we need (profit pa / total investment) x 100 = ROI %. To make sure we are happy with working this out, we will look at rental No. 5.
Case study 2
- Rental No. 5 on the market for £100k
- Purchase price £80k (75% LTV therefore £20k deposit)
- Renovation costs £1.5k
- Total investment £24.5k (£20k deposit, £1.5k renovation plus approx. £3k legal fees)
- Profit pa £3.72k (£550 rent – (£170 Mortgage + £20 Insurance + £50 maintenance) = £310 pcm profit … £310 x 12 = £3.6k pa)
- ROI = 3.72k / 24.5k = 15.2%
This is again an excellent ROI for a single let and is achievable because of house prices in the North of England. And again, because it was secured BMV.
Let us break the calculations down further. From a free property training seminar, I learned ROI at the end of 2019. It had only taken me 17 years as a Landlord. I might be a slow learner, but I get there in the end …
The ROI calculation at the free seminar was profit / total investment. The profit and total investment were broken down like this:
- Profit = Rent – (M + M + M) … the 3 M’s are Mortgage + Maintenance + Management
- From my experience, Maintenance is £50 pcm
- Management is normally 10% of the rent so that would be £50 pcm if the rent received was £500 pcm
- Mortgage payment is normally about 3.5% of the mortgage if you are limited and your product is interest only
- Total investment is deposit, solicitor fees, surveyor fees, stamp duty, local authority search etc
From case study 2, DUFF PROPERTIES are making £310 pcm with an ROI of 15.2%. This is another example that £250 pcm in my area, is very achievable. Again, these calculations are not taking tax into account. This is unique to each individual or each individual company and is really a book in itself. For more on property tax, see the book recommendations within the appendix.
Now you know your target profit per property, you can go and find some properties. Personally, my properties are all within a 6-mile radius of where I live. It is possible to go further afield but this will take more time and work.
What is important is that you research the area or areas you want to invest in. You want to be investing in an area of high demand.
Do the prep work
From my experience, it is very important to do some prep work before you get stuck into property investing. It is very easy to get swept away with your emotions. You might have had enough of your job and want to be a property millionaire within 12 months. Now this is possible, but not for everyone. Certainly not me currently. But with an obsession with personal development, I believe anything is possible.
Get the prep work done. And build your property business on solid foundations.
Now, as a team we know we need to earn £250 pcm profit per property. And we know we need to get 10 of these houses to achieve our FI in the UK. Again, this gets us £30k pa and this is the average income in the UK as I am writing in mid-2021.
If I don’t do the prep work, I might think a £150k 3 bed house single let will achieve our target £250 profit pcm. This would barely break even and definitely wouldn’t achieve our target profit pcm. That’s the case where I invest anyway.
With this in mind, my price range is £80-120k in the area I invest. The areas I am looking at is Middlesbrough and Redcar in the North East. Your figures will be different depending on your geographical area.
You might live in the midlands for example. That £150k 3 bed single let will get you more rent than in the North East. And will enable you to achieve at least £250 profit pcm.
Even the 2 areas I invest in achieve different rents. Most of my properties are 3-bed in Middlesbrough and most achieve a rent of £500-550 pcm. Even if I got a 4-bed in the same area I would struggle to get over £600 and would probably achieve £550 pcm. Now, rent prices do fluctuate so don’t quote me on these figures. This is from my experience in the area I invest in.
But I could achieve slightly more in Redcar for a 4-bed which is only 5 miles or so from where I live. Towards the back end of 2019, I got an offer accepted on a 4-bed terraced house in Redcar.
If my memory is correct, it was initially up for £110k. This was when I was looking for rental No. 5 and I was obsessed with BMV. I had a few initial bids rejected but finally got an offer of £82k accepted.
This was an awesome deal and the house was also a potential HMO (House of Multiple Occupation). After speaking to a couple of local estate agents, I knew the achievable rent was £650 pcm.
The deal fell through because of the survey report. There was damp and a few other issues and there was an additional £6k to pay before I could even go through with the deal. This showed my total lack of experience at the time. Sorry, not experience because I’d been a landlord for 17 years. It was because I was still an average landlord at that time.
Now I have done some training, I realise that even with this extra £6k it was still a good deal. And there was still a significant discount. Not only that, I could have went back and re-negotiated with the vendor. But, you live and you learn. It was simply because I was obsessed with getting a similar deal to rental No. 4. £50k BMV isn’t always possible and this is a lesson I have had to learn.
The beauty of getting around other investors, is that I’m not just learning from my own mistakes. Stumbling along and learning by trial and error. I’m learning from other investors. I’m learning from their mistakes and picking up on their skills and expertise. It makes a massive difference getting around other investors. I can’t stress this point enough!
Anyway, I’m going off on a bit of a tangent. The point is, different areas will demand different rents. Once you know the calculations and have some local knowledge you can get to your target figures. That target figure of £250 pcm for each property.
I know you can achieve more with serviced accommodation and HMOs and other creative ways of investing. But this book is about building solid foundations with single lets. Once you have that base, you can go off and do your own thing. You can go off and earn more cash flow.
My opinion is that it would be a mistake to rush in and try these creative ways of investing without building your base first.
At this stage, we have now done the essential prep work. Remember the 6 P’s from the British Military.
This might take you a few months. It might take you 6 months or even a year. Trust me, it is worth it.
Just learn from my mistakes. My property journey wasn’t built on solid foundations. It was built on shitty sand. And this led to 3 properties in 16 years. Things have improved over the last few years but I had many years of pain with regards to money and my 3 properties that were in £50k of collective negative equity. And I 100% don’t want you to be an average landlord.
- Work out how much you want to earn pcm and pa from your portfolio
- Break it down so that you know how much you need to earn per property
- Learn the calculations so you know how much you can afford to pay for a property to reach your profit targets
- Research the area you want to invest in so that there is a high demand and this makes void periods less likely
- Ensure you are fully aware of the market value of each property you look at by using up to date comparable data
Don’t even think about being average. You are a professional property investor.
What to do
Let me know what you think of this chapter from my next book – The Dormant Landlord. Any feedback is welcome good or bad and will make a massive difference to the quality if the book.
Book of the week: Rich Dad’s Cashflow Quadrant, Robert Kiyosaki. If you are looking for some early financial independence, this book is an excellent guide. It contains instruction and is easy to digest. Similar to Rich Dad Poor Dad, it is conceptual and helps the reader to understand asset’s, liabilities, income and expenses.
For a hard copy visit the excellent Imagined Things Bookshop: https://imaginedthings.co.uk/